Donald Trump has hailed his latest tax proposal as the “big beautiful bill” that could save millions of American jobs and increase take-home pay by as much as $5,000 (£3,700) annually. However, while the market has been preoccupied with the ongoing trade tensions, economists warn that the more significant test for investors may lie in the sweeping tax reforms themselves. The proposals, if enacted, would make permanent the Tax Cuts and Jobs Act (TCJA) introduced during Trump’s previous administration — a package that lowered corporate tax from 35% to 21% and trimmed the top income tax rate from 39.6% to 37%.
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Extending the TCJA beyond its current expiration date at the end of this year would come at a substantial cost. The Congressional Budget Office (CBO) estimates such a move could add $4.6 trillion to the deficit over the next decade. Trump has also unveiled plans to eliminate taxation on tips — a move likely to benefit hospitality workers — but this too would carry an estimated cost of $1.5 trillion, according to the Institute of International Finance. These proposed measures have raised concerns about the sustainability of the US’s fiscal path, particularly as debt interest now exceeds defence spending.
Raghuram Rajan, former IMF chief economist and one of the few who foresaw the 2008 financial crash, warns that America is already living beyond its means. He notes that additional tax cuts, especially those not paired with new sources of revenue or spending restraint, will deepen the fiscal imbalance. “Debt is already 98% of GDP,” Rajan said, “higher than most developed economies apart from France, Italy, and Japan.” While tax exemptions for tips and overtime might provide some income redistribution, Rajan expressed doubts about their long-term benefits, especially given the potential for abuse.
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The CBO’s long-term analysis forecasts that extending the TCJA could increase the national debt by $37 trillion over the next 30 years, while also shrinking economic output by 1.8% by 2054. Harvard professor and former IMF chief economist Ken Rogoff echoed these concerns, noting that although failing to renew the tax cuts might rattle markets, enacting them could accelerate inflation and deepen fiscal vulnerability. “The era of cheap borrowing is over,” Rogoff remarked. “The belief that debt was a free lunch has been dangerously misguided — and reality is now setting in.”
